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Battle For Iraqi Oil Heats Up After Iran-Saudi Deal

Iraq's crude oil production has been stuck between the 4.0-4.7 million barrels per day (bpd) level since 2016, with a mean average of about 4.5 million bpd during that period, but it could relatively straightforwardly produce 12 million bpd - way more than Saudi Arabia's true crude oil production average of 8.2 million from 1973 to last Friday. Key elements needed for Iraq to increase its crude oil production to this elevated level are contained in the US$27 billion four-pronged deal agreed with TotalEnergies but there are now doubts that all or part of this deal will proceed as planned. Following the recent landmark resumption of relations between Iran - which retains enormous influence over Iraq through political, military and economic proxies - and Saudi Arabia, brokered by China (and Russia to a lesser degree), it was made clear to Iran it should do all it could to stop major deals being done in Iraq by Western companies. Specifically, a source who works closely with the European Union's energy security apparatus exclusively told OilPrice.com last week, Iran was told by a very high-ranking official from the Kremlin that: "By keeping the West out of energy deals in Iraq - and closer to the new Iran-Saudi axis - the end of Western hegemony in the Middle East will become the decisive chapter in the West's final demise".  To recap on the TotalEnergies' proposed deal that, up until the signing of the relationship resumption deal between Iran and Saudi Arabia, was going ahead as planned. The first of these projects - and crucial in enabling Iraq to reach its longer-term crude oil production targets of 7 million barrels per day (bpd), and then 9 million bpd and then perhaps 12 million bpd, as analysed in depth in my new book on the global oil markets - was to have been the completion of the Common Seawater Supply Project (CSSP). The project, which would see an initial investment of US$3 billion in its first phase, involves taking and treating seawater from the Persian Gulf and then transporting it via pipelines to oil production facilities to maintain pressure in oil reservoirs to optimise the longevity and output of fields. The long-delayed plan for the CSSP is that it initially supplies around 6 million bpd of water to at least five southern Basra fields and one in Maysan Province, and is then expanded for use in other fields. The second of the projects is also a matter of high importance and urgent necessity: to collect and refine associated natural gas that is currently burned off at the five southern Iraq oilfields of West Qurna 2, Majnoon, Tuba, Luhais, and Artawi. TotalEnergies was to have provided US$2 billion in the first phase of the project for the building of the processing plant to do this, with initial comments from Iraq's Oil Ministry last year highlighting that the plant is expected to produce 300 million cubic feet of gas per day (mcf/d) and double that after a second phase of development. Iraqi Oil Minister, Ihsan Abdul Jabbar, stated last year that the gas produced from this second TotalEnergies project in the south will help Iraq to cut its gas imports from Iran. 

Related: WTI Breaks $70 As Kurdistan Halts Oil Exports

TotalEnergies already has ongoing experience of working across Iraq, holding a 22.5 percent stake in the Halfaya oil field in Missan province in the south and an 18 percent stake in the Sarsang exploration block in the semi-autonomous region of Kurdistan in the north. This gives it very specific operational experience of working on the ground in Iraq, which would also have enabled it to increase crude oil output from the Artawi oil field, which is the third of the four projects to which it was committed. According to earlier comments from Iraq's Oil Ministry, TotalEnergies would help to boost output from the Artawi oilfield to 210,000 bpd of crude oil, up from the current circa-85,000 bpd. Successfully capturing associated gas rather than flaring it will also allow Iraq to revive the also long-stalled US$11-billion Nebras petrochemicals project with Royal Dutch Shell, which if it went ahead in a professional way could be completed within five years and would generate estimated profits of up to US$100 billion for Iraq within its 35-year initial contract period. The last of the four projects that were to have been undertaken by the French company would be the construction and operation of a 1,000-megawatt solar energy plant in Iraq.

So, where is this deal now? "Highly fluid - China wants all the big [oil and gas] reservoirs in the Middle East," said the EU energy source. "It secured Iran's with the 25-year deal [Strategic Cooperation Agreement, first revealed anywhere in the world in my 3 September 2019 article on the subject], which also gave it the chance to leverage its influence more into Iraq's [oil and gas] reservoirs as well, and now it's got Saudi Arabia's too, to add to Russia's - that's a lot of oil and gas to control," he concluded.

Indeed, in the oil sphere, China now has effective control of two out of three top oil crude oil exporters - Russia and Saudi Arabia (with the other being the U.S, itself). In addition, China, via Saudi Arabia's leadership position in OPEC, has considerable influence over that organisation's oil as well. Whatever OPEC says, it is a cartel in all the ways that matter - organisationally, operationally, and in terms of its collective resources' power. OPEC was specifically mandated upon its foundation in 1960 to 'co-ordinate and unify the petroleum policies' of all of its member states - effectively fixing oil prices, just like a cartel. OPEC's cartel-like appearance is further enhanced by the facts that its members account for around 40 percent of the world's crude oil output, about 60 percent of the total petroleum traded internationally from their oil exports and just over 80 percent of the world's proven oil reserves. 

In the gas sphere, the nearest equivalent to OPEC - although currently not as powerful - is what has been referred to as 'Gas OPEC', which is the Gulf Exporting Countries Forum (GECF). Together, Russia, Iran, and Qatar - and Qatar and Iran share the world's biggest gas field (the North Field/South Pars reservoir) - account for just under 60 percent of the world's gas reserves, and they were the three countries that founded the GECF. The GECF's membership now comprises 11 members control over 71 percent of global gas reserves, 44 percent of its marketed production, 53 percent of its gas pipelines, and 57 percent of its LNG exports. Around one year ago, foreign ministers from Saudi Arabia, Kuwait, Oman, and Bahrain, and the secretary-general of the Gulf Cooperation Council (GCC) - which has considerable overlap with OPEC and the GECF - were arriving in Beijing for a five-day visit to push ahead on negotiations over the China-GCC Free Trade Agreement (FTA). At these meetings, the principal topic of conversation was to finally seal the China-GCC FTA and a "deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat". 

China does not only want to control all the major oil reservoirs in the Middle East but also to get greatly beneficial pricing on everything produced from them. By dint of the 25-year Strategic Cooperation Agreement with Iran it has been able to do this on precisely the terms laid down in my original exclusive piece on the deal. China has been able to use this as the basis for deals done with Iraq, given Tehran's strong and enduring influence over Baghdad. Specifically, the deals China wants involves 25-year contracts but - critically - ones that only officially start two years after the signing date, so allowing China to recoup more profits on average per year and less upfront investment. The per barrel payments to China for oil would be the higher of either the mean average of the 18-month spot price for crude oil produced, or the past six months' mean average price. It would also involve at least a 10 percent discount to China for at least five years on the value of the oil it recovered. For gas recovery, the basic terms are the same, but in terms of pricing China wants whichever developer that takes the lead to receive a 30 percent discount to the lowest mean one-year average market price at the key gas pricing hubs for the gas it captured. 

By Simon Watkins for Oilprice.com

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Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for… More